The Day Ahead: The Masses Are Unconvinced

In my routine reading session this weekend, I quite honestly learned very little about the current market -- which only led to me spending additional time trying to find potential "gotcha" events. Here's what I did manage to unearth:

First, in February, sit back and be prepared to absorb wacky S&P 500 calls, both up and down. It will be your job to decode if these have any validity. As an example, on Sunday I read about one prediction of a slide to 800, but the problem is that the thesis was disgustingly outdated.

Second, market-top predictions are being tossed into popular debate, underlined by horrendous reasoning -- because there is no fresh insight. When I rang the alarm bells late last week, at least I had viable data to back it up. The market rally has yet to win over the masses, that's for sure. That suggests the market is not at its peak, even in spite of less-than-inspiring factors -- such as the jobs-market headlines, and silly robust earnings projections for this year that likely will soften over the course of 2013.

Third, the bulls sound too supercharged in their defense of the rally. It makes me wonder if these fee-collectors are pumping the hype and preparing their teams to dump a little.

Another read: Keep an eye on the Shanghai Composite, as the index is reacting negatively to positive data on China's recovery. The fear is that valuations are not as attractive amid the transition to a new government. The stock-market reaction here has me on alert regarding what could happen to the U.S. market in February as we ingest data that's supposedly set to re-accelerate. (I say "supposedly" since the market rally implies this will occur, yet the actual reads on the data are mixed at best.)

Finally, I still lack a solid feel on whether January business treads are sustainable, or if they're a sort of post-fiscal-cliff sigh of relief. For instance, for January, Starbucks (SBUX) reported core U.S. retail-sales momentum that was consistent with that of December. Elsewhere, W.W. Grainger's (GWW) sales trend has rebounded, and Tempur-Pedic (TPX) has experienced no further deterioration in its operating environment vs. the third quarter.

It's unfortunate that the bears can't find anything new that is of even mild interest for their case. The average price-to-earnings multiple for S&P 500 stocks is nearing its average from 1954, and the CBOE Volatility Index (VIX) is currently chilling in no-man's land. There just has to be a series of minor negatives bubbling beneath the surface. But I don't see them, and that simplicity says market roadblocks are missing, at least in the very near term. That is, there are lurking, building structural risks that I don't believe are "priced in" -- but they aren't yet identifiable in corporate financial statements and in the macroeconomic picture.

Risk Factor List

Given the market's elevated levels, I have begun to build one of these risk lists -- items to which I will be paying careful attention in the week ahead. Specifically, I'll be watching how stocks react and the direction of the prints vs. the prior month. In other words, will the good December news continue?

Expectations component in the consumer confidence report: Given the market's appreciation and rise in home values, a transition has to start sentiment moving back to more positivity on the part of consumers. If there's no rebuilding of confidence, the market could grow impatient and fears will spread that stock are overvalued -- notably as it regards small-caps and the consumer discretionary sector.

Sustained increase in U.S. Treasury yields: This would serve to choke off the housing recovery; sentiment is for yields to trade in a range, and top out around 2.05%.

Federal Open Market Committee release: This would be a risk if it contained even the smallest upgrade in economic conditions

Chicago Purchasing Managers Index: If this continued to log weak numbers in new orders, it would feed into already-subpar employment indicators.

If I Had to Make Some Stock Picks Today

I would take gain some long exposure to Yahoo! (YHOO) and Harley Davidson (HOG) into earnings.

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